Getting Started
As design-build continues to increase market share, more and more contractors will begin to explore the process of teaming with architects and engineers to propose upon and execute design-build opportunities. Regardless of how the
relationship is structured -- i.e., contractor as the lead, A/E as the lead, or joint venture -- contractors need to consider a variety of issues as they evaluate who to team with and how to best organize the team.
Who Should Be Your A/E Partner?
History has shown that successful design-build teams are built around teamwork and trust. The contractor must respect the A/E’s expertise in design and professional duties to the public.Likewise, the A/E must recognize the contractor’s need for cost-effective, practical and timely design solutions that meet the objectives of the owner’s program. When each member of the design-build team understands the legitimate needs of the other team members, and trusts the team to act in the best interest of the team and the owner, few roadblocks exist to a successful and profitable venture.
There are several concrete ways to establish this type of relationship on your design-build projects. First, attempt to work with A/E firms that you know well and for which you have a high degree of professional respect. These are firms that should share your business philosophies in dealing with clients, particularly with respect to responsiveness, cost structure, risk tolerance and ability to work within the context of a team. Remember to look behind the organization to the specific individuals that will be performing the work -- these individuals will be the key to success once the job starts. Consider also whether the A/E:
Has some unique capabilities (i.e., local or industry sector expertise) that can make for a winning proposal and provide a great product for the owner;
Will be able to self-perform the critical design elements, and, if not, whether it is better capable of managing the subconsultants than you are; and
Is capable of assuming any risks associated with the project -- which may lead you into some interesting risk/reward allocations.
Above all, don’t forget that although the most talented A/E may help you get the job, it does not guarantee a successful and profitable project. As in all cases, make sure that your partner will be able to (a) produce buildable construction drawings, (b) cooperate in having its design value-engineered to meet the owner’s cost goals and (c) take responsibility for deficiencies during performance.
Who Should Do What On The Team?
Contractors and their A/E team members frequently pay little attention to their respective rights and obligations until after they are successful in obtaining an award. However, the right time to develop and document the business deal is at the teaming stage -- the point in time when the structure of the arrangement needs to be understood by both parties.
Teaming agreements, which are often similar in form to a Memorandum of Understanding, need to address a variety of factors, including:
- Who owns the work product developed by the design-build team, regardless of whether the team is successful in obtaining the award?
- What will the be the role of the A/E during construction, particularly vis-a-vis inspection, shop drawing review and payment certification? These can affect risks and price.
- How will the parties deal with errors in the plans and specifications?
- Will this funded from a contractor contingency fund or absorbed by the A/E directly or through insurance?
- How will confidentiality be addressed?
Although there are myriad other issues to be considered -- including price, schedule, sharing of risks and rewards, the parties should also evaluate whether the A/E will be paid anything during the proposal stage for its work product in developing the design.
Lessons Learned.
There are few reported cases that deal with disputes between the contractor and A/E on design-build projects. However, one recent case, Maddox v. Benham, is a reminder of how bad things can go wrong if the relationship between the contractor and A/E is flawed and the A/E fails to perform. In this case, Benham, an engineering firm that had contracted with Maddox, the design-builder on a coal renovation facility, was found liable to Maddox for almost $3 million for failing to properly and timely complete the design.
Much of the liability stemmed from the failure to provide Maddox with a preliminary design prior to the proposal that would have enabled Maddox to properly estimate the cost of performing the work. It is particularly important to note that the parties had not been operating from a written teaming agreement and only developed a formal written subcontract several months after award. This case would likely have had a different result if a typical teaming
agreement was in place.
Part 2
In the last edition of Constructive Comments, we discussed the importance of documenting the relationship between the A/E and Contractor with a written teaming agreement. As promised, this edition will discuss the Maddox v.
Benham case, which highlights some of the problems that an A/E can experience when a teaming agreement is not in place.
Background.
In early 1990, Electric Energy, Inc. (EEI) solicited design–build proposals to remodel the coal processing system of its electric power plant in Joppa, Illinois. C.L. Maddox, a general contractor, entered into an oral
agreement with The Benham Group, an engineering firm. As a result, Benham prepared drawings, specifications and equipment information that Maddox used to prepare a lump sum construction cost for the project. It was agreed that
Benham would be paid $58,200 for these services. In July of 1990, Maddox submitted its formal proposal, which relied heavily upon the quantity estimates prepared by Benham. Maddox received a letter of intent from EEI and in
September of 1990 entered into a fixed contract of $10,326,881 with EEI.
Shortly after signing the design–build contract, Maddox and Benham agreed to a written subcontract for a fixed price of $616,050, which was retroactively dated to June 1, 1990. This subcontract required Benham to complete its design
work by January 2, 1991. Part of Benham's basic services included keeping Maddox, the contractor, "informed of the progress and quality of the work" and endeavoring "to guard [Maddox] against defects and deficiencies in the work of
[Maddox]." The basic services did not include the compilation or preparation of bidding information, but did provide that Maddox "shall furnish all cost estimating services required for the project." The subcontract also contained an integration clause stating that all prior agreements were superseded.
Sign of Early Trouble.
The decision indicates that Maddox encountered problems with Benham's performance from the beginning of the project, including (1) delayed drawings that were often insufficient; (2) Benham underestimated the amount of work to complete the final design; and (3) Maddox installed part of the wiring without plans because prints for the electrical components of the project were not available. The record, however, indicated that not all of the delays were Benham's fault. Because EEI had been making design changes, Maddox had often failed to provide Benham with vendor–prepared drawings in a timely manner. Maddox had also been slow in approving Benham's drawings, which delayed submission of the drawings to EEI.
The Decision.
During the five week jury trial, Maddox sought damages of, among other things, $2,746,717 for bidding errors, engineering errors and delays caused by Benham. The jury found in favor of Maddox on the issue.
Benham first argued that the oral contract was superceded by the written contract and could not be used as basis for a claim. The Eighth Circuit Court of Appeals was not persuaded by Benham's arguments. The Court concluded that the oral contract for preliminary bidding was a wholly separate and independent contract which was bargained and paid for by Maddox, with full performance having been completed by Benham. It also felt that the oral contract did not
conflict with the written contract, since Maddox's responsibilities in the contract to furnish "all cost estimating services" for the project related only to final design costing (as indicated by the title, "Agreement—Final Design") as opposed to the estimating duties of Benham in preliminary design.
Benham argued that even if the oral agreement was a separate contract, Maddox could not recover against Benham on a breach of contract because Benham had not guaranteed the accuracy of the bidding information. The court disagreed, finding that under Missouri law Benham had in fact guaranteed the accuracy of the bidding information because it had repeatedly assured Maddox and EEI that it was well qualified to do the work and that it had the expertise and manpower to perform. The court also noted Maddox's testimony that it had to rely on Benham's bidding information in order to bid the project because only Benham "knew precisely what was going to be designed."
Lessons Learned.
Not only is this case a strong reminder of the need for a teaming agreement, but it also tells you what can go wrong if one of the parties faces a major loss on the project. It is doubtful that Maddox actually was expecting Benham at the time of contracting to provide a warranty of construction costs, and would likely have not objected if Benham had standard language identifying its limited role in this area. However, the losses on the project made this argument possible and, without a pre–proposal agreement, Benham was susceptible to the argument.
This information is provided by Victor O. Schinnerer & Company, Inc. as the program administrator for the CNA Professional Liability Insurance Policy for Design Professionals. The CNA/Schinnerer Program is the Commended Program of The American Institute of Architects and the National Society of Professional Engineers.
In each issue of Constructive Comments we answer questions on important contractor issues. Do you have a question you would like answered? Please submit all questions to: Attention: Constructive Comments, at info@schinnerer.com or fax to 301-951-5444.
This article is taken from Constructive Comments. The contributing editors are Michael C. Loulakis and Owen J. Shean, shareholders in the Washington D.C. area law firm of Wickwire Gavin, P.C. They can be reached by phone at (703) 790-8750, or by fax at (703) 448-1801. E-mail can be sent to bmoison@wickwire.com.
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